It has been over a month since the Bank of Canada has risen the interest rate for the first time in seven years. The boost in rates would have definitive effects on how borrowers do business with their clients, but probably one of the most affected markets will be the housing market in regards to mortgages.
The consequences of the interest rate increase on your mortgage depends on a number scenarios and where you fit into each of them. Whether you have a variable-rate mortgage or a fixed-rate mortgage, will determine just how the change to interest rates will impact your mortgage situation.
Do you have a variable-rate mortgage?
Approximately one-third of Canadian homeowners have variable-rate mortgages, that mirror the movements of interests rates in the economy. Meaning, they rise and lower in tandem with the general levels of interest rates.
The bump in rates last month will see monthly payments increase for those with variable-rate mortgages. As expected, the Bank of Canada increased the rate by 0.25 of a percentage point, and will most likely continue with that amount for future increases.
Let’s use an example of someone who has a home worth $750,000. Hypothetically, we’ll say they had a minimum down-payment of 10 percent and a variable-rate mortgage with a 5-year term with an interest rate of 1.75 percent and 25 year amortization. Prior to last month’s rate hike, they would have had a monthly payment of $2,864. Now with an increase of 0.25 of a percentage point they would be paying $83 more at $2947 per month. Many money managers are anticipating the Bank of Canada’s key interest rate to jump a full percentage point by the end of next year. In this case, the monthly payments would increase by $341 per month to $3,205.
Do you have a fixed-rate mortgage?
Over 65 percent of Canadians have a fixed-rate mortgage, which means the rate remains locked for the term of the loan.
The interest rate hike affects these types of mortgages differently as fixed-rate mortgages usually follow bond yields, which is the amount of return investors receive on bonds. However, investor sentiment about what the Bank of Canada does with it’s key rate strongly influences bond yields. Hence, last month interest rate hike will potentially affect fixed-rate mortgages. Prior to the rate change, the simple mention of the possible hike affected bond yields, by resulting in an increase of rates for 5-year fixed mortgages in June and July. This could mean that Canadian homeowners with a fixed-rate mortgage will potentially pay a higher interest rate when they refinance their loan.
The take away…
- Even though rates on fixed-rate mortgages are on the increase, they are still a lot lower than they were five years ago. So people with a 5-year mortgage that is coming up for renewal in the near future may get a lower rate than previously available
- If you’re looking for a house right now, you may want to look into a pre-approved 5-year mortgage, so that it guarantees today’s fixed rate for 120 days